Wednesday, June 11, 2014

Applying the Rules of all Markets to Art

There's a sentiment afloat in this frothy art market that rampant flipping and other practices among the creators, buyers, and sellers of art that were perhaps previously considered questionable are in fact entirely ethically neutral. It's a temporally convenient sentiment, and not one I would expect to see continue should the art market crash. But it's fairly widespread at the moment.

The sentiment that ethics don't come into this relies heavily on the assertion that such practices are entirely in line with the well-established rules of any market, and that art is no different from any other commodity and never has been. Dealers are in essence art brokers, and there is no ethical implication one way or the other for art investors turning any level of profit they can, especially given the level of risk they take on. The "law of supply and demand" justifies any resale price a seller can get.  

This sentiment has recently extended into the dialog among artists, as well. On social media today, you'll see artists arguing that the "law of supply and demand" justifies mass production or accelerated output and whatever marketing effort it requires to strike while the art market is hot. In market terms, the assertion is that there is no ethical implication one way or the other for manufacturers putting any product they can produce and that consumers will pay for into the market.

To suggest any of this is ethically problematic is to be accused of everything from sour grapes to rhetorically denying one a decent living (seriously, I've seen that). Most often it's to be accused of being "naive" or "overly romantic" or even "puritanical."

I believe the opposite is true. The naive or romantic notion at play here is that free market theory in any supportable way aligns with the practices of the current booming art market. The truth is that the art market is a highly protected cocoon posing as a typical market when that suits the objectives of its players and completely ignoring standard market rules when they don't suit the subjective objectives of its players. As it currently operates, the art market would break apart at the seams should it be forced to follow the rules of other markets. Indeed, applying the rules of all markets to art, as many of those involved in flipping art know all too well (and any artists making the arguments above should know too), would very likely result in an extremely different art market and art-making climate from the one we have today. More than that, if the "law of supply and demand" were truly applied to the art market, it would change the very nature of what it means to "be an artist."

Let's go to the grand poohbah of market rules here, Adam Smith, to see just how differently the current art market actually operates from other markets. From An Inquiry into the Nature and Causes of the Wealth of Nations : Book 1, Chapter 7: Of the Natural and Market Price of Commodities:

When the quantity brought to market exceeds the effectual demand, it cannot be all sold to those who are willing to pay the whole value of the rent, wages, and profit, which must be paid in order to bring it thither. Some part must be sold to those who are willing to pay less, and the low price which they give for it must reduce the price of the whole. The market price will sink more or less below the natural price, according as the greatness of the excess increases more or less the competition of the sellers, or according as it happens to be more or less important to them to get immediately rid of the commodity. The same excess in the importation of perishable, will occasion a much greater competition than in that of durable commodities; in the importation of oranges, for example, than in that of old iron.
In free markets, then, even durable commodities, like iron (or [some] art) must be sold to those willing to pay less when there is more supply than demand. That means, if an artist's new body of, say, paintings doesn't sell out through an exhibition or a year or two's worth of art fairs (i.e., within the standard period in which it's expected the artist will have created a new body of work), market rules say their previous paintings' prices should be lowered. Sellers of other goods do this through means such as a publicly announced "clearance sale." Now you might say that happens in the art market via discounts, but here's where those pesky ethical questions begin to creep in. Smith notes that "the low price which they give for it must reduce the price of the whole." In other words, if discounts are given, the "price of the whole" (that is all other similar artwork) must be similarly reduced. That currently does not happen in the primary art market, and so we have our first example of where "the rules of all markets" are not being applied.

The rationale behind not lowering the prices for paintings that don't sell in such time frames is twofold: 1) works of art by emerging artists are priced at speculative levels to start off with (if you doubt that, have any work by a relatively unknown artist without an auction record appraised by a major auction may be in for a rude surprise), which you'll note is another difference between the art market and most other markets; and 2) speculative prices make sense because we assert that the "value" of a work of art is determined in part by its cultural significance, which demands a longer-term selling period than other commodities to verify or dismiss. But even if we cling to rationale number 2, what Smith also notes about supply exceeding demand is often entirely violated quite consciously by the art market:
If at any time [supply] exceeds the effectual demand, some of the component parts of its price must be paid below their natural rate. If it is rent, the interest of the landlords will immediately prompt them to withdraw a part of their land; and if it is wages or profit, the interest of the labourers in the one case, and of their employers in the other, will prompt them to withdraw a part of their labour or stock from this employment. The quantity brought to market will soon be no more than sufficient to supply the effectual demand. All the different parts of its price will rise to their natural rate, and the whole price to its natural price.
In other words, if an artist's recent body of work doesn't sell, normal market rules would expect that artist to stop making more work until demand resumes again. In some instances, of course, this does happen. Artists who can't earn a living from their work stop making art and turn to other pursuits. But the current contemporary art market makes a great deal of allowances for artists whose output exceeds demand. Based on agreement from their dealers and/or pressure from their existing collectors or simply through their own determination, many artists simply push ahead into their next series, and their next series, supporting their practice as best they can from other sources of income, hoping some awareness among consumers will emerge about the value of their inventory. Their dealers too, often choose to keep them within the gallery program, still give them exhibitions, and promote them as best they can from other sources of income based on faith in their work and its future potential. This is entirely illogical by other market standards. Not only does producing more artwork increase the already over-abundant supply, which market rules insist will only make matters worse, but it clearly consumes capital that could (arguably, should) be put to work toward promoting other products. And so we have our second example of where "the rules of all markets" are not being applied to art.

But this particular matter isn't over. Smith then tells us
The whole quantity of industry annually employed in order to bring any commodity to market naturally suits itself in this manner to the effectual demand. It naturally aims at bringing always that precise quantity thither which may be sufficient to supply, and no more than supply, that demand.
This is another way of saying production in the studio should stop until which point demand resumes. Here's generally where arguments about practice and personal needs/drives to create art enter the reasoning for not complying with the rules of all other markets. This dovetails into arguments that art-making is not only the production of's a process...a calling, even. A studio isn't just a manufacturing plant, but a sanctum. So slowly any adherence to the rules of all markets are already giving way to romantic notions.

But lets not assume it's only artists and dealers who are invested in this market anomaly. Would-be flippers too have a motivation for the artist to remain productive (or at least appear to be) in this situation. Unlike other markets where consumers who are interested in a particular product might welcome a dip in demand (a resulting stoppage in production is of no real consequence to them outside how it helps them purchase this commodity at reduced prices), the end consumer in the art market doesn't want the artist to turn to other pursuits or even necessarily to make very different work. Up to a point (and usually well past capacity for a few years anyway), a steady supply of similar product is in the flipper's best interest, regardless of effectual demand. It's pointless to have the only work of its kind in a market where one is counting on brand recognition to command higher resale prices, at least hopefully some day.

And so a pattern emerges that points to how the art market has built-in protections, contrary to the rules of other markets, designed to extend how long any product has a chance to sell at a speculative price and how long an artist can continue to create art even in the absence of demonstrable demand. I personally have no problem with this. To me, the time required for the cultural value of an artwork to be verified justifies these protections. But let's not pretend then that all behaviors based on the rules of other markets are natural or ethically neutral in such an artificially protected market context.

The fact of the matter is, classical free market theory points to how flipping art doesn't necessarily help the artists being flipped and, more than that, actually harms other artists. Flippers who've studied Smith must know this. Still, flipping apologists will argue that regardless of how distasteful the practice is, it's not unethical because art is not a zero sum game. This may be true in a limited, perhaps macro sense, but it's far from true in a practical, individual-artist sense.

Again turning to Smith we find a clear parallel to the effects of the artificial focus on a smaller group of artists that flipping art brings about and an illustration of how it not only doesn't benefit the artists whose art is being flipped, but indeed harms other artists:

A public mourning raises the price of black cloth (with which the market is almost always understocked upon such occasions), and augments the profits of the merchants who possess any considerable quantity of it. It has no effect upon the wages of the weavers. The market is understocked with commodities, not with labour; with work done, not with work to be done.
In other words, flipping takes advantages of a temporary spike in demand for a particular product, but that spike doesn't necessarily trickle back into the studio...into the money the artist who created the work will necessarily see. Moreover, once the temporary demand has been exhausted, there's no guarantee of any continued demand (the market is understocked with current artwork, not with artwork yet to be created). Smith continues:
[A public mourning] raises the wages of journeymen tailors [i.e, auction houses]. .... It sinks the price of coloured silks and cloths, and thereby reduces the profits of the merchants who have any considerable quantity of them upon hand. It sinks, too, the wages of the workmen employed in preparing such commodities, for which all demand is stopped for six months, perhaps for a twelvemonth. The market is here over-stocked both with commodities and with labour.
Because of the temporary focus on black cloth (i.e., a small group of hot flippable artists), the demand and hence price of colored cloths (i.e., other artists' works) sinks. That focus sinks too the wages of those other artists and their dealers. Through this example, the potential impact on other players of spikes in flipping  becomes more apparent. But as we know, although demand does, the prices of other artists' work don't actually sink. According to the rules of all other markets, though, they should.

And so, we see that any argument that the art market is simply following the rules of all markets is untrue. There are un-ignorable exceptions to the rules within the contemporary art market, set up specifically because the true value of art (its cultural significance plus its financial worth) requires a much longer time to discern than is typical of other commodities. More than that, we see that classical market theory predicts there will be significant consequences on the rest of the contemporary art market when spikes in flipping art occur.  All of which, to my mind, makes any defense of previously questionable behavior based on free market theory either naive or willfully duplicitous. 

In other words, if you want to flip art for fun and profit, letting the collateral damage fall where it may, or you wish to sell out to that system as an artist, by all means, go ahead...just don't hide behind the rules of the typical market as your excuse. They don't actually provide you cover.


Blogger Jonathan T. D. Neil said...

Ed, I'm having a hard time connecting the ethical emphasis at the beginning of this piece to the conclusion, which seems to want to slap people down for calling 'flipping' -- or let's just call it 'dealing' -- a basic or common market activity and to justify it in these terms. I may be reading it incorrectly, but according to your argument here all market activity w/r/t contemporary art can create the "collateral damage" you're calling out.

Also, there has been centuries of economic work on the behavior of markets since Smith (c.f. the marginal revolution, price elasticity of demand, information economics), which make it hard to (1) accept some of your translations of Smith's work to the present-day art market; and (2) to accept Smith as articulating the 'law of all markets'. I get the 'let's get back to the roots' sensibility, but in this case, I'm not convinced it's effective (perhaps a bit like going back to Newton, and only Newton, to talk early universe cosmology -- and no, I'm not trying to elevate the art market to the level of astrophysics).

I only raise these questions because I do think it's an important line of thinking. Frankly I think there's a stronger argument to be made, even though I don't share it, for how the values bound up in a free market ideology "crowd out" the values that are bound up in, say, an aesthetic ideology that governs contemporary art, or something like this.

It's hard not to draw the implication from what you write above that, even when confronted with a public mourning, people should not all buy black cloth, that they should spontaneously develop a new custom of display w/r/t their belonging within a particular social world (in which being seen to mourn a certain way has value) and buy colored cloth!

6/12/2014 04:18:00 PM  
Blogger Edward_ said...

Thanks for the comment, Jonathan.

I accept that Smith's take is very antiquated, but his basic message on supply and demand is about as sophisticated as the defense of flipping ever gets in the dialog about this, so it seemed right to begin the discussion there. I took the title for this post from an actual quote in a report on a defense of flipping.

I would argue, though, that there are important and significant differences between "dealing" (in the primary market at least, with the legal responsibilities dealers have as artists' agents) and the level of rampant "flipping" work by living artists we're seeing today, in particular of work by many without a museum track record or other milestones that would help ensure cultural validation were under their belts, which could help them maintain a career when the market cools.

The crowding out of aesthetic ideology seems accurate if your only source of information about art is the mainstream press, social media, and publications that focus (even when they claim not to) on art market concerns. A strong and vigorous dialog about aesthetic and conception ideas still exists, of course, but I'll bet you a billion its readership is miniscule in comparison to the market press.

It's hard not to draw the implication from what you write above that, even when confronted with a public mourning, people should not all buy black cloth, that they should spontaneously develop a new custom of display w/r/t their belonging within a particular social world (in which being seen to mourn a certain way has value) and buy colored cloth!

Nice reasoning!

I'd counter though, that you could also conclude that the lesson here is that it's worth the effort to prevent as much as possible the cause of widespread public mourning. Major dignitaries' natural deaths aside, tragedies are often preventable with a reasonable dedication to vigilance. In the case of the art market, I would suggest that vigilance take the form of what this post is designed to do...calling objectionable behavior "objectionable." It's a social activity, collecting art, and so social means of encouraging behaviors that take artist's careers into consideration would seem called for and appropriate.

If there's a better argument than the overly simplified "law of supply and demand" excuse for why flipping without concern for an artist's career is ethically neutral, I'd like to hear it.

6/12/2014 04:39:00 PM  
Anonymous J.V. said...


Excellent post. I'm not sure my thinking is as clear as yours, but I know what you're saying.

On one hand -- yes -- flipping is part of free-market activity. We hate the ruthless efficiency of the stock market, but we accept that it provides an important service in many ways.

On the other hand, the main difference between the world of fine art and the world of commodity manufacturing is not that the studio is a sanctum, but that the artist is a monopolistic single proprietorship. That sounds like a funny concept, but I think it's basically true.

Also, the harm due to flipping is very different from the harm due to product fads. One day BlackBerry was hot. The next day it was bankrupt. Free markets in action. Its employees suffer from their employer's fate, but their careers do not completely tank. They pick themselves off, and -- economy and other factors allowing -- move on.

When an artist's work is subject to flipping, however, and then when one artist's red-hot "iPhone" supplants another's stone-cold "BlackBerry", as it were, the "BlackBerry artist" is completely crushed.

One should hope that there is a fair free-market solution to this, but if there is, I'm not sure what it is. The market as a whole does not suffer -- iPhones, BlackBerrys, they all look fabulous above a sofa! -- but one person does, and suffers hard.

Can we label flipping a form of abuse? I'm not being facetious or flippant. I'm being serious. Markets are only free when they operate under a regime of strong protection from abuse. Maybe it's a stretch, but if the artist whose work is being flipped is somehow no longer "free", then we need to label it an abuse.

I have absolutely no idea what Adam Smith or his intellectual descendants say on the subject of abuse, but this is the best way I can imagine to reconcile the freedom of parties to contract with each other, with the possibility of serious harm to a third party as a result of that contract.

But you know what? Here's a thought. Following on the idea of a monopolistic single-proprietorship, let's observe that the government regularly grants protection to creative notions through patents, copyrights, and so on. The government grants temporary monopoly to such creators so that they have a fair chance to recoup their investment. Is it inconceivable that government could grant a form of protection along those lines here...?

6/12/2014 06:40:00 PM  
Anonymous Stephen said...

Brilliant analysis, Ed. Thank you!

6/13/2014 10:24:00 PM  
Anonymous Anonymous said...

very interesting. the reverse of flipping, of course, is dumping. I have a friend whose work was bought very early on, en masse, and for very healthy prices (set by the gallery) by a very high profile collector. At the time, it seemed like a great thing. a couple of years later they were sold at auction. because this artist didn't have an established market/auction record, they did not sell for anywhere near what they were bought for. and the artist's market, and career, took a severe hit.

6/16/2014 10:21:00 PM  
Anonymous Anonymous said...

Flipping = The Greater fool theory.

Caveat Emptor

6/17/2014 11:40:00 AM  
Anonymous Anonymous said...

Flipping = The Greater fool theory.

Caveat Emptor

The majority of the art market is like the new car market the minute you pays your money and drive off the lot your fucked.

But most people know that when they buy a new car or any other wigit or gizmo that's all shiny in the box.

6/17/2014 11:45:00 AM  
Anonymous Anonymous said...

Didn't know arty types could be so analytical and wordy. Here goes: 'let the buyer decide'.

8/14/2014 10:57:00 PM  
Blogger Edward_ said...

Didn't know (what we're left to assume must be) financial types could be so cliched and aphoristically useless.

Ok, so that's a joke. Of course we knew that. ;-p

8/15/2014 09:05:00 AM  

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